A new report from the World Bank reveals that the world’s 26 poorest countries are struggling more than ever with debt. These nations, where about 40% of people live on less than $2.15 a day, are facing severe challenges as they become increasingly vulnerable to natural disasters and economic shocks. Meanwhile, international aid is at its lowest level in 20 years, pushing many of these countries to borrow money under harsh conditions.
Economic Struggles
This report is the first detailed look at why the poorest economies, defined as those with annual incomes below $1,145 per person, are experiencing chronic financial issues. It shows that these countries are, on average, worse off today than before the COVID-19 pandemic, while many others have largely recovered. The average government debt in these countries has risen to 72% of their total economic output, the highest it has been in 18 years. Nearly half of these nations are in serious financial trouble, a significant increase since 2015. Not a single one of them is considered to be at low risk of debt distress.
Aid Declines
Low-income countries are finding it harder to attract affordable loans. In 2022, the amount of official development assistance fell to 7% of GDP, the lowest level in 21 years. As a result, the World Bank’s International Development Association (IDA) has become their main source of low-cost financing. IDA offers grants and loans with very low interest rates to help the world’s most vulnerable economies. In 2022, IDA provided almost half of all the development aid these low-income countries received from international organizations.
Support from IDA
Indermit Gill, Chief Economist at the World Bank, emphasized the importance of IDA, stating, “At a time when many countries have turned away from the poorest nations, IDA has been their lifeline.” He noted that over the past five years, IDA has directed most of its resources to these 26 low-income countries, helping them overcome significant setbacks. IDA has funded job creation, education, healthcare improvements, and access to essential services like electricity and clean water. However, to break free from ongoing emergencies and meet development goals, these countries need to increase their investment levels significantly.
Rising Costs Due to COVID-19
The COVID-19 pandemic has led to increased spending needs in low-income countries. Government deficits tripled to 3.4% of GDP in 2020, and these countries have struggled to lower these deficits since then. In 2023, their deficits stood at 2.4% of GDP, nearly three times higher than the average for other developing nations. As a result, governments are now prioritizing immediate needs, such as salaries, debt payments, and subsidies, over long-term investments in areas like health and education.
Opportunities Amid Challenges
Despite these challenges, the 26 poorest countries have the potential for growth. They have rich natural resources and a growing workforce. However, they also face significant obstacles. Two-thirds of these nations are experiencing conflicts or struggle to maintain order due to weak institutions and social issues. Most of these countries rely on exporting commodities, making them vulnerable to economic ups and downs driven by fluctuating commodity prices.
The combination of conflict and commodity price swings creates a challenging situation for these nations. Wars can worsen government finances, while drops in commodity prices can significantly increase their debt. The effects of these economic shocks can last for years.
Vulnerability to Natural Disasters
Additionally, the report highlights that low-income economies are at a higher risk of natural disasters compared to other developing nations. From 2011 to 2023, these disasters caused average annual losses equivalent to 2% of GDP, which is five times higher than the losses faced by lower-middle-income countries. Adapting to climate change also costs more for these nations, averaging 3.5% of GDP each year—five times the rate for lower-middle-income countries. These challenges mean that low-income countries must invest more and improve their economic management significantly to achieve development goals by 2030.
Call for Action
Ayhan Kose, Deputy Chief Economist at the World Bank, stated, “There is much that low-income economies can—and must—do for themselves.” He suggested that these countries could expand their tax bases and improve how they manage public spending. However, they also need stronger international support, including more cooperation on trade and investment, and increased assistance for IDA. This help is crucial for mobilizing additional resources and implementing necessary reforms. Kose concluded that IDA remains a vital partner for these countries due to its proven track record, affordable financing options, and expertise in development.
